VES-3-18-RR:BSTC:CCI H086244 GOB
Supervisory Import Specialist
c/o Vessel Repair Unit
U.S. Customs and Border Protection
1515 Poydras Street, Suite 1700
New Orleans, LA 70112
RE: 19 U.S.C. §1466; Vessel Repair Entry C20-0040754-7; Protest 2002-09-100121
Dear Sir:
This is in response to your memorandum of November 20, 2009, forwarding for our review the protest filed by Totem Ocean Trailer Express (“protestant”) with respect to Vessel Repair Entry C20-0040754-7. Our ruling is set forth below.
FACTS:
The WESTWARD VENTURE (the “vessel”), a U.S.-flag vessel, incurred foreign shipyard costs. The vessel arrived in the port of Beaumont, Texas on March 19, 2008. A vessel repair entry was timely filed.
Your office issued a letter of duty determination on May 15, 2009 with respect to the application for relief. A protest was subsequently filed seeking relief from duty on numerous expenditures.
ISSUE:
Whether the costs for which the protestant seeks relief are dutiable under 19 U.S.C. § 1466?
LAW AND ANALYSIS:
Initially, we note that the information in the file indicates that the protest, with application for further review, was timely filed under the statutory and regulatory provisions for protests. 19 U.S.C. 1514(c)(3) and 19 CFR 174.12(e).
Title 19, United States Code, section 1466 (19 U.S.C. §1466) provides for the
payment of duty at a rate of fifty percent ad valorem on the cost of foreign repairs to vessels documented under the laws of the United States to engage in foreign or coastwise trade, or vessels intended to be employed in such trade.
Title 19, United States Code, sections 1466(h)(2) and (3) provide as follows:
The duty imposed by subsection (a) of this section shall not apply to-
. . .
(2) The cost of spare parts or materials (other than nets or nettings) which the owner or master of the vessel certifies are intended for use aboard a cargo vessel, documented under the laws of the United States and engaged in the foreign or coasting trade, for installation or use on such vessel, as needed, in the United States, at sea, or in a foreign country, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff Schedules of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country, or
(3) the cost of spare parts necessarily installed before the first entry into the United States, but only if duty is paid under appropriate commodity classifications of the Harmonized Tariff Schedules of the United States upon first entry into the United States of each such spare part purchased in, or imported from, a foreign country[.]
In its administration of the vessel repair statute, Customs and Border Protection (“CBP”) has frequently used the following definitions:
Equipment – An article which constitutes an operating entity unto itself. Equipment retains at least the potential for portability. Equipment may be affixed to a vessel in a non-permanent fashion, such as by means of bolts or other temporary methods, which is a feature distinguishing it from being considered an integrated portion of the hull and superstructure of a vessel. Examples would include winches and generators.
Material – An item which is consumed in the course of its use and/or loses its identity as a distinct entity when incorporated into the larger whole, e.g., paint and sheets of steel.
Part – An article which does not lose its essential character or its identity as a distinct entity but which, like materials, is incorporated into a larger whole. It would be possible to disassemble an apparatus and still be able to identify a part. Examples would include piston rings and pre-formed gaskets.
In Texaco Marine Services, Inc., and Texaco Refining and Marketing, Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994), aff’g 815 F.Supp. 1484 (Ct. Int'l Trade 1993), the court stated in pertinent part as follows with respect to the reach of 19 U.S.C. § 1466:
Texaco urges us to reject the Court of International Trade’s “but for” approach and to interpret “expenses of repairs” so as to exclude those expenses (e.g., expenses for clean-up and protective covering work) not incurred for work directly involved in the actual making of repairs. Such a reading has no basis in the plain language of the statute, however. Aside from the inapplicable statutory exceptions, the language “expenses of repairs” is broad and unqualified. As such, we interpret “expenses of repairs” as covering all expenses (not specifically exempted in the statute) which, but for dutiable repair work, would not have been incurred. [Emphases supplied.]
In SL Service, Inc. v. United States, 357 F.3d 1358 (Fed. Cir. 2004), rev’g 244 F. Supp. 1359 (Ct. Int’l Trade 2002), cert. denied December 13, 2004, the Court of Appeals for the Federal Circuit upheld CBP’s proration of certain shipyard expenses. The court stated in pertinent part as follows:
. . . apportionment is consistent with section 1466(a) and the “but for” test. In the context of dual-purpose expenses, it is rational to impose the duty on only that portion of the expense that is fairly attributable to the dutiable repairs. Indeed, to impose the 50% ad valorem duty on the entire costs of dry-docking in this case would exceed the mandate of the statute. The logical appeal of apportionment has been recognized in other areas of the law . . .
. . .
Customs’ long-standing practice of apportioning the cost of various expenses between dutiable repairs and non-dutiable inspections and modifications comports with both the statute and common sense.
In its administration of the vessel repair statute, CBP has held that modifications, alterations, or additions to the hull of a vessel are not subject to vessel repair duties. The identification of work constituting modifications vis-à-vis work constituting repairs has evolved from judicial and administrative precedent. In considering whether an operation has resulted in a nondutiable
modification, the following factors have been considered. These factors are not by themselves necessarily determinative, nor are they the only factors which may be relevant in a given case. However, in a given case, these factors may be illustrative, illuminating, or relevant with respect to the issue of whether certain work may be a modification of a vessel which is nondutiable under 19 U.S.C. § 1466:
1. Whether there is a permanent incorporation into the hull or superstructure of a vessel, either in a structural sense or as demonstrated by means of attachment so as to be indicative of a permanent incorporation. See United States v. Admiral Oriental Line, 18 C.C.P.A. 137 (1930). However, we note that a permanent incorporation or attachment does not necessarily involve a modification; it may involve a dutiable repair or dutiable equipment.
Whether in all likelihood an item would remain aboard a vessel during an extended lay-up.
3. Whether an item constitutes a new design feature and does not merely replace a part, fitting, or structure that is performing a similar function.
Whether an item provides an improvement or enhancement in operation or efficiency of the vessel.
Additionally, we note that in order to qualify as a nondutiable modification rather than a repair the documentation of record must reflect that the element which was replaced was in full working order at the time the work was performed.
You request our review with respect to the items discussed below.
Item 16. Bottom plugs. The protestant states: “The bottom plugs in question were removed in order to drain the tanks of liquid prior to inspection by the American Bureau of Shipping as required for Drydocking Survey.” The invoice provides: “Bottom plugs. Removed / refitted, vacuum tested and cemented.” The documentation of record provides for extensive repairs with respect to the tanks. We find that this cost should be prorated between dutiable and nondutiable costs.
Item 17. Hull Preservation – High pressure water washing. The protestant states: “The items in question relate to the High Pressure Water washing of the Hull prior to sand blasting and coating. High Pressure Water Washing was necessary to allow for inspection by ABS and USCG prior to sand blasting and coating. As it was our intent to sand blast the entire hull, water washing was not necessary except for inspection.” We have carefully examined the pertinent invoice. We find no basis upon which to distinguish the high pressure water washing from other dutiable items listed under “Hull Preservation.” We have previously held high pressure water washing to be dutiable. See, for example, HQ 112480 dated March 16, 1993 and HQ 112478 dated March 30, 1993. Accordingly, we find that this cost is dutiable under 19 U.S.C. § 1466(a).
Item 21. Mobilization of two portable pump units. The pertinent invoice provides: “Mobilized two portable pump units. Pumped out to dock bottom existing water from compensation tanks[.]” Another item (# 46) provides that steel repairs were made to the compensating tanks. We find that this cost is dutiable as an item incident to repairs.
Item 22. Tanks cleaned and sludge removal. The documentation indicates that certain repairs were performed with respect to these tanks and that the tanks were subject to an inspection. We believe that the tank cleaning and sludge removal relates to the performance of dutiable and nondutiable work. In HQ 113798, dated January 9, 1997, we found that sludge removal in preparation for ABS and U.S. Coast Guard surveys and inspections should be prorated between dutiable and nondutiable costs. In HQ H052778, dated May 5, 2009, we held that engine room bilge and sludge tank cleaning should be prorated between dutiable and nondutiable costs. We find that these costs should be treated similarly, i.e., prorated between dutiable and nondutiable costs.
Item 24. Inspection of sea chests. The invoice provides that the sea chests were “removed, cleaned, grit blasted, painted and reinstalled as per tender.” We find that this cost is a repair and/or maintenance item which is dutiable under 19 U.S.C. § 1466(a).
Item 26. Sea Overboard Valve Inspection. The protestant states: “The Sea Valves in question were required to be opened, cleaned, and closed in good order for inspection by the American Bureau of Shipping as required for Drydocking Survey.” The invoice indicates the overhaul of many valves. Additional documentation (Drydock and Repair Specifications) provides: “Open out for examination the listed sea and overboard valves. Grind in globe and angle valves, clean and polish disc and seats of gate valves. Clean valve internals. Test valve seat sealing area by bluing …” A document entitled “Tender No. S015119” provides as follows with respect to this item: “Allow hand operated globe-, gate- and storm valves to open in place, clean, paint and re-close with new joints and packings of normal type. Grind in globe valves up to dia 200 mm is included. Butterfly valves up to dia 300 mm to remove, clean, check seals and refit, excl. operating gears. Access work, repairs and renewals if required[.] Not included. Renewal of owners supply rings for butterfly valves in place if required 40% of overhauling rate will be applicable.” The invoices indicate maintenance operations (and perhaps repairs). The protestant has not provided satisfactory, documentary evidence that this work is nondutiable. We find that this cost is dutiable under 19 U.S.C. § 1466(a).
Item 36. Starting Air Bottle. The invoice provides: “Overhauled 2 nos relief valves and calibrated[.]” We find that this cost is a repair and/or maintenance item which is dutiable under 19 U.S.C. § 1466(a).
Item 58. Boiler Mounting Valves. The invoice provides: “Overhauled all above valves as per tender … Removed/replaced insulation in way of boiler valves overhaul … Following steam safety valves to be overhauled and tested…” We find that this cost is a repair and/or maintenance item which is dutiable under 19 U.S.C. § 1466(a).
Item 59. Main and emergency switchboards cleaned. Based upon a consideration of the work performed and the precedents, we find that this cost is nondutiable. For example, we found this type of work to be nondutiable in H052778 dated May 7, 2009, HQ 116492 dated June 27, 2005, and HQ 115603 dated May 16, 2002.
Item 76. SVDR (simplified voyage data recorder system) assistance. The protestant claims that the installation of the SVDR is a nondutiable modification to the vessel. We find that these costs are dutiable as vessel equipment or the cost of installation of vessel equipment. Vessel equipment is not a nondutiable modification to the vessel. This issue, or this particular type of issue, has previously been thoroughly considered by CBP. See, for example, the discussion, including the authorities cited, in the following rulings: HQ 113798 dated January 9, 1997, where we found a radar system to be dutiable as vessel equipment; HQ 226688, dated July 29, 1997, where we found a radar system to be dutiable as vessel equipment; HQ 114092, dated September 12, 1997 (revoking HQ 111425), where we found a radar system and a satellite communications system to be dutiable as vessel equipment; and HQ 114093, dated September 12, 1997 (modifying Memorandum 109936), where we found a satellite communications system to be dutiable as vessel equipment. In these rulings, we considered whether the item at issue was a nondutiable modification to the vessel or vessel equipment. We concluded that the item at issue in each ruling was dutiable under the vessel repair statute as vessel equipment. We find similarly in this entry and protest – these items are dutiable under 19 U.S.C. § 1466(a) as vessel equipment. See also HQ H052778 dated May 7, 2009 and H068756 dated August 5, 2009, where we found Furuno SVDRs to be dutiable under 19 U.S.C. § 1466(a) as vessel equipment.
Item 79. Aft Peak Manifold. The invoice provides: “Removed/reinstall manifold piping. Supplied and installed 9 nos blank flanges.” The protestant states: “The manifold in question contained the suction and fill lines for the three (3) After Peak Tanks. These tanks have never been used and it was decided to blank the lines from the manifold to assist with future tank inspections from ABS. The
existing piping was modified to include hard blanks. These blanks isolated the after peak tanks from the manifold, creating void spaces in lieu of the original ballast tanks. There was no problem with the original piping. Piping was modified for increased efficiency during regulatory inspections.” We find that this cost is a nondutiable modification as it does not involve a repair or equipment.
Item 86. Insulation replaced on the HP turbine, turbo generator. The protestant states: “The turbines in question are required to be inspected by ABS as part of the vessel Special Continuous Machinery Survey….The scope of this inspection requires the turbine casing be opened for visual inspection of the internal parts. The insulation used on the turbine is a high heat castable product that adheres to the casing to provide a tight bond. The insulation is destroyed upon removal and it is not possible to be re-used.” We find that this item is nondutiable as it is incident to a nondutiable inspection.
Item 87. Fabricated and installed end covers for ramp davit forward area. The invoice provides: “Fabricated and installed end covers for ramp davit fwd area.” The work specification provides: “Provide labor and materials to fabricate and install steel covers over the exposed ends of the vessels ramp outrigger foundations.” We find that this cost is not dutiable under 19 U.S.C. § 1466(a) as it does not involve a repair or equipment.
Item 93. Manhole covers. The invoice provides: “Drill out broken bolts of manhole covers. Retap and install new bolts.” The protestant claims that this cost is eligible for treatment under 19 U.S.C. § 1466(h)(3). However, the protestant has not provided any documentary evidence in support of a claim that this item meets the requirements of 19 U.S.C. § 1466(h)(3), nor has it provided any documentation establishing the costs within this item which might be attributable to parts which might be eligible for 19 U.S.C. § 1466(h)(3). We find that this cost is dutiable under 19 U.S.C. § 1466(a).
Tab 7. American Bureau of Shipping (“ABS). The following costs are at issue as described on the “cover” ABS invoice: Annual Hull Survey; Special Continuous Machinery Survey; Special Periodical Survey; Drydocking Survey; Tailshaft Survey (Tail shaft); Tailshaft Survey (Tube Shaft); Initial Survey Anti-Fouling System; Boiler Survey – Water Tube Boiler Port; Boiler Survey – Water Tube Boiler Starboard; Modification Survey; and Annual Survey - Preventative Maintenance. (The protestant is not disputing the dutiability of the Damage Repair Survey listed on the “cover” ABS invoice.) We have thoroughly reviewed the pertinent invoices. We find that the following are dutiable as they involve repair or maintenance items (in some cases, very extensive repairs) or
dutiable equipment, which are not separately itemized: Annual Hull Survey; Special Periodical Survey; Initial Survey Anti-Fouling System; the two Boiler Surveys; Modification Survey; and Annual Survey - Preventative Maintenance. The following are nondutiable as they do not appear to involve repairs or dutiable equipment: Special Continuous Machinery Survey; Drydocking Survey; and the two Tailshaft Surveys.
Tab 8. Norcom Services, Inc. The protestant claims that the costs on this invoice are eligible for treatment under 19 U.S.C. § 1466(h)(2). We find that the following items are equipment and therefore not eligible for such treatment: batteries, fuses, amplifiers, CPU cards, power supplies, and watt meter. These items are dutiable under 19 U.S.C. § 1466(a). The remaining items are eligible for treatment under 19 U.S.C. § 1466(h)(2).
Tab 11. Seacoast Electronics. The protestant claims that the costs on this invoice (Furuno S-band radar system) are eligible for treatment under 19 U.S.C. § 1466(h)(2). We find that the items are equipment and therefore not eligible for such treatment. The costs are dutiable under 19 U.S.C. § 1466(a). See the discussion under item 76, above.
Tab 13. Hiller Systems, Inc. The invoice provides: “Provide/install smoke detector sys 75% complete.” The protestant claims that the costs on this invoice are eligible for treatment under 19 U.S.C. § 1466(h)(2). We find that the item is equipment and therefore not eligible for such treatment. This item is dutiable under 19 U.S.C. § 1466(a).
Tab 14. Nico International. The protestant requests relief with respect to certain items related to the boilers, including the opening, closing, and cleaning of access doors and the cleaning of the boilers. There were repairs performed to the boilers, as well as ABS surveys performed with respect to the boilers. We find that the costs on this invoice should be prorated between dutiable and nondutiable costs.
Tab 15. Emirate Safety Services Limited. The protestant states: “The invoices in question are the result of the vessels annual firefighting equipment inspection as required by the US Coast Guard.” We find that the inspection, testing and certification of the CO2 system and of the wet agent galley hood system are nondutiable as they appear to be required regulatory inspections. We find that the other items on this invoice are dutiable under 19 U.S.C. § 1466(a), as they involve repair, maintenance, or dutiable equipment.
Tab 16. Seacoast Electronics. The protestant claims that the costs on this invoice (Furuno SVDR) are eligible for treatment under 19 U.S.C. § 1466(h)(2). We find that the items are equipment and therefore not eligible for such treatment. They are dutiable under 19 U.S.C. § 1466(a). See the discussion under item 76, above.
HOLDING:
The costs for which the protestant seeks relief are dutiable, nondutiable, or to be prorated under 19 U.S.C. § 1466, as discussed in the Law and Analysis section of this ruling.
You are instructed to grant the protest in part and deny the protest in part with respect to the costs discussed in this ruling.
In accordance with the Protest/Petition Processing Handbook (CIS HB, January 2007), you are to mail this decision, together with the Customs Form 19, to the protestant no later than 60 days from the date of this letter. Any final duty determination of the entry in accordance with the decision must be accomplished prior to mailing of the decision. Sixty days from the date of the decision the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Glen E. Vereb
Chief
Cargo Security, Carriers and Immigration Branch